BIS: Elisa Ferreira: From repair to vision - conceptions for a common beneficial and resilient fin. architecture and institutional framework

02 November 2018

The Vice-Governor of the Bank of Portugal points out that Europe must address pressing questions on what is still missing to safeguard financial stability. Absent a fully-fledged EDIS in the medium term, a plan is urgently needed for the interim period (until a banking union can be completed).

She suggests:

First, the development of a specific institutional regime to address Member States' concerns over the risks of potential failures of cross-border banking groups: host Member States within the BU need tools to address financial stability risks arising from locally systemic undertakings; the absence of such instruments currently hinders progress on issues such as:

• the adoption of waivers on liquidity and capital, and
• the removal of options and national discretions (ONDs).

In this context, the transformation of subsidiaries into branches has emerged as an answer to the host responsibility for covered deposits - however that implies, at least, when local undertakings are of systemic relevance to the concerned Member State, that:

• domestic supervisors should have a say in the day-to-day supervision and should have the capacity to react to strategic decisions affecting branches as they would have had had it been a standalone entity;
• national resolution authorities are adequately involved and empowered in the definition of resolution plans and in the resolution action when it occurs.

Second, solutions need to be found for the orderly exit of traditional medium-sized deposit-taking banks without disrupting financial stability. Whereas MREL and bail-in requirements may work for larger banks, there may be no clear room for a 'middle class' of institutions whose business model may be incompatible with MREL requirements; institutions that may be of no public interest at EU level but still have systemic relevance at local level.

Instead of moving immediately towards a further straitjacketing of Member States' room for manoeuvre with the harmonisation of EU banks' liquidation regimes, efforts must be made towards the establishment of an enabling framework for the "orderly" winding-down of locally systemic relevant banks, combining elements of the resolution and liquidation frameworks, while preserving value and protecting creditors and non-financial borrowers.

Possible paths to be explored might include:

• the establishment of special insolvency proceedings, with recourse to administrative options, attributing some of the instruments currently envisaged in the BRRD for banks in resolution to a liquidating authority, as an alternative to the 'atomistic' court-led liquidation regime. (The liquidating authority and the funding sources available would need to be identified.)
• ensure effective financing of the deposit insurance systems for deposit transfers abiding by the least cost principle with the liquidating authority having the option to offer guarantees or enter into profit and loss sharing regimes. (For that, a revision of the applicable state aid rules would be required.)

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